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The impact of elections

Warnings about the impact of elections on economic growth are misplaced.

Apr 25, 2011
Lyndsie Bourgon

After the dissolution of Parliament on March 26, a visibly unhappy Stephen Harper delivered a single overriding message to Canadians: the opposition had called a reckless and opportunistic election that would jeopardize Canada’s economic recovery from the recession.

“Now is not the time for economic uncertainty,” he said from the steps of Rideau Hall, adding that stability in Ottawa — both fiscally and politically — was the Conservative party’s goal for Canadians. But is there any indication that an election would threaten Canada’s political stability and lead to economic uncertainty, or worse?

Not quite, says University of Toronto political history professor Robert Bothwell. “Elections rarely impact the economy,” he says. “Elections reflect the economy, not the other way around.” Thus far, the markets have agreed — the Canadian dollar is holding strong, and the TSX continues its climb back to pre-recession levels. Bothwell notes that Canada’s current state of affairs — with voters heading to the polls for the fourth time in seven years — isn’t unprecedented, since a similar situation occurred when the country saw an election held in 1962, 1963, 1965 and 1968. Liberal leader Lester Pearson helmed a succession of minority governments, and even then, the country’s economy grew steadily.

However, a new report from the Central Bank of Chile suggests that political instability actually is harmful to economic growth. The study, which surveyed 169 countries, found that “higher degrees of political instability are associated with lower growth rates of GDP per capita.” Essentially, political unrest — measured by the number of times in a year in which a new premier is named and/or 50% or more of the cabinet posts are occupied by new ministers — was found to hamper GDP growth by impeding productivity-increasing investments in physical and human capital.

Nevertheless, many economists and historians agree that simply having a number of elections in a short period of time does not necessarily mean a country is politically unstable. Frank Atkins, an economist at the University of Calgary, says a study like this simply does not apply to Canada’s situation.

“We don’t count at all as politically unstable,” he says. “It’s unlikely in an economy like Canada’s that having repeated elections is going to harm the economy, because people go about their everyday business anyway. There’s no threat that the country will fall apart, like there would be in a Third World country.”

But the study from the Chilean Central Bank also suggests that constant trips to the polls can end up shortening policy-makers’ horizons, making long-term planning difficult. And even if the elections don’t lead to a change in government, there is a danger of legislative gridlock. Indeed, hundreds of bills on the parliamentary order paper were killed when the federal election was called, meaning they’ll have to be reintroduced by a new government in May. While it might not have a strong economic impact immediately, the legislative and bureaucratic slowdown that an election causes does affect projects, programmes and other initiatives that require federal money or leadership.

Two major issues that have fallen off the radar include the controversial national securities regulator bill, as well as Bill C-32, the copyright bill that has been tabled and killed three times due to elections. “The national securities regulator bill wouldn’t have gone through anyway,” says Bothwell. “Failure to pass is bad, but in the face of provincial objections, the government couldn’t do much anyway.” Atkins agrees, saying the effect of killed bills on the economy is not black and white. “It depends on if you think these bills really matter, and if they’re really necessary for the functioning of Canada,” he says. “They will get passed eventually.”

Atkins thinks the economic impact of an election, if any, is more subtle. “There may be minor problems that cause instability, because Parliament is basically on autopilot,” he says. “So who’s running the show?”

But his main concern is the money being spent on vote-buying promises that will have a negative effect on the economy. “If you look at how elections are run in Canada, you can’t run a campaign unless you give out goodies. What they’re doing is formulating policy based on voters rather than the economy.”

According to Atkins, there’s a deeper issue that applies to spending and voter promises, even before an election is called. He cites the theory of ‘political business cycles’ — the idea that “incumbent governments will do things like ramp up spending when an election is approaching,” he says. This leads to a dangerous process, where ramping up spending to secure votes eventually leads to cutting spending after the election, producing a boom-and-bust pattern.

As for the election itself, Craig Alexander, chief economist at TD Bank, agrees that, historically, there is no sign that multiple elections result in an economic downturn. “The only time the economy has truly been affected by an election is if there’s a contentious economic issue being debated,” he says, citing the free trade debates during the 1988 election, which essentially acted as a referendum on the topic. Alexander expects the effects of the election on the economy won’t be truly known until the results are in.

“What you tend to see is a knee-jerk negative reaction if there’s a change in government, because markets hate uncertainty,” he says. “After the election, financial markets will decide how they feel about the new government. If it’s a return to power, there won’t be a significant reaction.” Alexander adds Canada’s fiscal situation is in good shape: “As long as [the new government] tries to eliminate the deficit in four to five years, I don’t think [the markets] will be fazed by the outcome.”

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